All these policies depend on fiscal capacity. Once the latter runs out, short term cyclical policy becomes ineffective. In contrast, credible long run fiscal consolidation relaxes the fiscal capacity constraint and enhances the effectiveness of short term policy. An economy that is near its fiscal limits is susceptible to runs on its public debt and to destabilizing feedback loops.

On this blog, I used to discuss his ideas (like here or here) but I’ve grown tired of it. If you are still arguing in 2013 that there is a limit to fiscal spending – called fiscal capacity constraint – then you are just show that you have no understanding of how the monetary system actually works. Taking the US – the issuer of the world’s reserve currency – as a case of fiscal capacity constraint is a sad choice. This kind of insulated thinking in the economics discipline is not without historical precedent. Here is Carl Föhl, a German economist who published a book on economics in 1937 just after Keynes did and very similar in content, stating the following (p. 6 in the 2n edition):

This is a large sentence to translate, but let me try: professional circles [of economists], which in the years before 1933 [when Hitler came to power] were concerned about the prevention of a second inflation fought with great fury the ever more concrete job creation programs of the NSDAP [the Nazi party], cannot be spared the accusation of having been misled by a dogmatic generalization of theorems which are only of limited validity to deny the accuracy of conclusions which, using common sense, have been clearly correct. What Föhl says in the paragraph I took the quote from is that credit creation leads to more incomes and more employment, and government can do it if it wants to. (The second edition is from 1955, so he writes with hindsight.)

I can only hope that MIT students will find out the flawed ideas of (one of) their teachers and instead try to look for answers elsewhere.